Discuss the determinants of the equilibrium interest rate and how it may change. What can the Fed do to change the interest rate?
The interest rate is determined through the interaction of the demand and supply of money. The demand for money consists of the transactions, precautionary and speculative demands for money. The demand for money curve is downward sloping reflecting the inverse (negative) relationship between the quantity of money demanded by people and the interest rate. The supply of money curve is expressed as a vertical line because it is independent of the rate of interest. The supply of money can be changed by the Fed changing required reserves, the discount rate and by using open market operations. The Fed should increase the money supply to reduce interest rates.
You might also like to view...
Vertical relationships can increase profits through
a. preventing firms from evading regulation b. creating a double-markup problem c. better aligning the incentives of manufacturers and retailers d. preventing price discrimination
The marginal propensity to consume (MPC) is the change in consumption divided by the change in disposable personal income
a. True b. False Indicate whether the statement is true or false